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The Weeds: there's a disturbing economic trend no one's talking about. Obama's top economist explains.

Dylan Matthews is a senior correspondent and head writer for Vox's Future Perfect section and has worked at Vox since 2014. He is particularly interested in global health and pandemic prevention, anti-poverty efforts, economic policy and theory, and conflicts about the right way to do philanthropy.

"Some firms are super successful, posting high returns year after year after year, and other firms are pretty mediocre. Of course, that's always true … but the gap between them has grown enormously. Combine that with the fact that if you work for a more successful company, you will be paid more even if you're doing exactly the same job and have exactly the same skills you would've brought to a less successful company. This increased inequality among firms translates through to wages and is generating and contributing to some of the increase in inequality we're seeing." — Jason Furman

Jason Furman has been described as the "wonkiest wonk in the White House." For the past three years, he's worked as the chair of the Council of Economic Advisers — Obama's chief economist — but he's been an important part of Obama's brain trust since the 2008 campaign, helping design the stimulus and Obamacare.

He's also just a very interesting person; he had a teenage career as a street juggler in Greenwich Village, and was college roommates with Matt Damon, who describes him as "one of the smartest people that I’ve come across."

And in the later years of the administration, he's started doing some really interesting research into rent seeking: a term economists use for ways in which people and businesses try to get more money for themselves without actually creating anything of value. That additional slice of the pie is known as a "rent." What Furman has found is that zoning rules that make it hard to build in big cities, and occupational licensing requirements that keep people out of jobs, are generating huge rents for landlords and license holders, and holding back the economy a lot in the process.

I recently sat down with Furman for a special episode of The Weeds.(You can listen to our discussion by subscribing to the podcast or streaming it on SoundCloud.) Listen to hear about rent seeking but also:

  • What Furman is proudest of achieving in the White House
  • Why he still supports the Cadillac tax when Hillary Clinton and Bernie Sanders are calling for its repeal
  • Why Medicaid's still a good deal despite that Oregon study casting doubt on it
  • How the share of working-age men outside the labor force has been steadily growing — and no one really knows why
  • What we can learn from Chinese trade's effects on American jobs

For more podcast conversations — including episodes with Rachel Maddow, Bill Gates, political scientist Theda Skocpol, Sen. Cory Booker, restaurateur David Chang, and conservative activist Grover Norquist — you should also subscribe to The Ezra Klein Show.

Show notes


Dylan Matthews: We're less than a year until the end of this administration. You've been here since the beginning. What, looking back, are you proudest of having been involved in, and what is you're biggest regret that you weren't able to get done?

Jason Furman: Proudest would be two things. One is a set of policies that helped save the economy from going into a second Great Depression. The recovery act was larger than anything we'd ever done before in this country. It had a huge amount both in terms of macro policy but also energy, innovation, dealing with poverty, putting us in a better position to deal with a lot of the issues that our country faces. Together with a bunch of other steps it worked and we're in better shape today than most of the other advanced economies because of those efforts.

The second thing is the Affordable Care Act, which is not just twenty million people with health insurance, not just contributing to the slowest health cost growth in fifty years through a range of measures showing quality is better but is also the biggest step we've taken on inequality in decades. Having been a part of both of those is two of the proudest things I've done with my life.

DM: Let's dig in a little bit to the second point since I think this doesn't get covered a lot in coverage of the Affordable Care Act. What do we know about its effect on inequality? Do we have numbers on that yet or just a sort of general sense of the structure?

JF: We're working to do a better quantification of that. When you have tax subsidies for people between a hundred and four hundred percent of poverty. A medicaid expansion in all the states that have taken it up and, obviously, they all should take it up. All the states that have taken it up for people up to a 138% of poverty you're talking about something that represents a very progressive change. Those changes were funded, in part, by steps like taking the Medicare tax which right now had historically applied to earned income and applying it to unearned income. You had to pay it on your capital gains and dividends in addition to your work.

DM: That sort of debate over healthcare has opened up again this election cycle. As huge of an achievement as the Affordable Care Act is there are, obviously, some holes. There's still a large uninsured population much smaller than it was but still substantial. What do you think is the next step if you were devising a set of ways to expand it? Would it be a public option or all-payer rate setting, global budgeting? What do you think of as being part of a package like that?

JF: The next steps are, frankly, to fully implement it. The important set of those steps are in the hands of governors and state legislatures that have outrageously chosen not to take a ninety percent Federal match, a hundred percent initially, to do something that is right by their citizens, right by their economies, so getting all those states in. The Affordable Care Act gave us a lot of tools on the delivery system. It gave us a huge amount of flexibility to experiment in Medicare and find ways to either save money without worsening quality or improve quality without hurting cost. We're continuing to roll things out and deploy things based on that.

Then the final thing the Affordable Care Act gave us was the most powerful tool we have to create an incentive for less health care cost in the private sector which is the Cadillac tax and that is scheduled to go into effect in 2020. There's some reforms we could do to target it better but the most important thing is making sure that goes into effect. There's certainly more we could do. There's more we could legislate before we even have that conversation. There's a lot of tools we already have in this law that we haven't yet fully put to use and to keep pushing that forward.

DM: How much does it worry you that both Democratic candidates want to repeal the Cadillac tax outright?

JF: I am not going to comment on an election but as a matter of public policy I think the Cadillac tax is a combination of lowering health costs, raising wage growth, cutting the deficit and complimenting the other changes in the Affordable Care Act. I think it is a really important progressive priority and part of the overall strategy to raise wages and for that reason I think it's important.

DM: The argument there is once we start treating health benefits closer to how we treat wages the bias towards doing compensation in regards of health insurance rather than wages will be reduced. People's wages will go up. There's an argument used sometimes here from labor quarters.

I know Josh Bivens at EPI has made this argument that the empirical case there isn't there. We don't have an experience of analogous situations employers diverting compensation back to wages. Are you persuaded by that argument?

JF: I think there's a strong theoretical case that when health costs are growing up really quickly employers aren't going to pay the same types of wage increases. There's a strong empirical case and a range of studies but finally there's just a practical common sense one.

You can go through everyone who's ever been at the bargaining table and they have quotes from a decade ago saying health cost growth is so high that when we get to the bargaining table the employer is telling us they won't give us a wage increase because all of our money went to extra health benefits and the health benefit cost growth is really hurting our wages.

The question then is the converse also has to be true. It has to be a lot easier to bargain for wage increase in a world where you don't have to spend as much time and energy fighting for those extra dollars on health.

DM: From the other perspective there's an emerging critique, not just of the Affordable Care Act but of Medicaid, in general, deriving from this Oregon study. There's a contention that the health effects we saw in this random case where Oregon Lottery to access to a Medicaid expansion that there weren't huge physical health benefits. There were some mental health gains.

Also there's a recent interpretation of the study arguing that it suggested Medicaid recipients valued the benefits significantly less than the cash value. Maybe it would be better to just give people the money rather than providing it through an insurance system. I'm curious what you make of that since it obviously hasn't changed your overall view on the wisdom of this policy but it does seem to be affecting the debate.

JF: I think there's three sets of reasons why you'd want public subsidies for health insurance for lower income households. The most important is health and I'll come back to that. Second is it's a way to get more money or more resources in the hands of people that need it, addressing the inequality that we were talking about before, the progressivity.

Third, giving someone a dollar versus giving them insurance. If they really need it they get a lot more than a dollar and if they didn't maybe they don't get anything is more valuable even if the average cost is just a dollar than giving someone a dollar. I don't want to lose that health part which was the first and most important argument. I think the Oregon study gave us pretty clear evidence of certain health benefits, both self-reported how people felt about their health and in areas like mental health, which you referred to.

On almost everything else the study was what an economist would call under-powered. The study only followed people for a year and a half because after a year and a half everyone got into Medicaid. You give someone insurance for a year and a half, you ask how much more they're going to go to a doctor. How much more is a year and a half of a doctor going to make a difference and you'd predict it would make a difference. Not a massive, massive difference but a meaningful difference.

You compare that prediction to what they found they found something pretty similar to that they just didn't have a large enough sample size to proclaim that as statistically significant. I don't think the study could have found definitive health impacts because there just weren't enough people in it and it didn't last for long enough.

DM: To move onto the first thing you were proudest of working on, the economic recovery. We're recording this shortly after the latest jobs report came out and we were talking before we were recording we don't see the employment-to-population ratio of prime-age men, so men from 25 to 54, back to where it was before the recession, that it's better than the nadir of the recession but it's not where it was previously. You had an interesting explanation for why you think that is and it's, in some ways, more concerning than just the economy not having fully recovered.

JF: Let me start with a positive story. The unemployment rate was 10 percent, it's now 5 percent. The official unemployment rate doesn't count discouraged workers. If you count them you see the same trend. It doesn't account people working part-time for economic reasons. You count them you also see the same trend. Whatever measure of unemployment you use it is way down and the broader measures of unemployment have actually recently fallen more quickly than the official measure of unemployment. We really have seen a remarkable recovery in our labor market.

It's a little bit like a huge wave came crashing in and then the wave recedes and two things happened. It had a little bit of damage that it leaves in its wake but you can also see what was there on the beach before the wave rolled up over it. What was there on the beach was a sixty year long decline in the percentage of men between the age of 25 and 54, so-called prime-age men who were in the workforce. In the 1950s 97 percent of men were in the workforce either in a job or looking for a job. Only 3 percent were out of it.

It steadily, decade after decade, grew to be 12 percent. In fact, every single economic recovery we've had in this post-war period save one the employment population ratio for prime-age men ended up lower than where it was before the recession. In that sense you never have ever fully recovered from a recession. I think that's a trend we see that's been going on for a long time.

It's concentrated among men with less education. It's not because their spouses are working. Less than a quarter of them have a working spouse. It's not because disability insurance is out of control. Disability insurance is a small fraction of those people who are out of the labor force. I think it's something about our economic system that we really need to worry about and work on solving.

DM: We have four times as many working age men that are not in the workforce as we did 60 years ago and we basically have no idea why.

JF: We know a certain amount about who they are, less education, less skills. There's a number of explanations we can rule out but absolutely we don't have a great explanation. You don't need to have a perfect explanation of something to get to work solving it. Extra infrastructure would help us solve this wage insurance, help people get back into a job would solve it. There's a whole bunch of things that would make it better.

DM: Do we have any longitudinal sense, do we have a sense if these were men who were at one point were working and then lost a job and had trouble recovering? Is it people who are just sort of persistently excluded?

JF: It seems to be that the losses are concentrated in recession. Your in the workforce, you lose your job, you don't get back on your feet and you stay out of the workforce thereafter seems to be the predominant story.

DM: Is this concentrated in particular industries? Is it that men who are working in a manufacturing or a construction job that is pretty well-paying but not super high-skill lose their job and then what's available for them are sales clerk positions that won't get them on their feet?

JF: It certainly coincides with a decline in manufacturing as a share of the economy. I haven't followed the particular workers in the data to ask where they came from and which industry they entered from. I think that's an interesting question.

DM: How do these people get by? Do we know anything about if they're not working and they're not mostly on disability insurance and they're not mostly getting money from their spouse if this isn't a stay-at-home dad situation? You're also saying that this is concentrated in people with lower income. It's not like we have a bunch of twenty-seven year olds getting PhDs.

JF: Or collecting dividend checks.

DM: Right.

JF: Yeah, the data aren't clear about that and people aren't starving. People are getting income from somewhere. Maybe it's from a family member. Maybe there's some government program although there aren't a whole lot for able-bodied men without children. To some degree this is a similar group to the one that's seen it's mortality go up, that's seen it's opioid use go up. There's a set of bigger problems that we need to worry about in that community.

DM: Is some of this a failure of response to not just the decline of manufacturing but of specifically to trade? The David Otter study on the effects of opening to China, while not terribly definitive, debunking of the idea that we should have been open to trade to China did suggest that the losses for jobs among a certain segment of men were pretty massive in certain areas. Did we just not handle that shock well?

JF: I think we haven't handled ... There's been a set of technological changes, a set of changes associated with trade and globalization. China's entry in the world economy is, in some sense, sui generis. We'd never seen anything that large, and we're not going to see something that large again.

You look at something like TPP, that's with a different set of countries with a different set of rules associated with it with a different set of disproportionately knocking down barriers overseas. You don't want all trade and all trade agreements lumped together to say you learned something from that experiment with China for something that's very different.

Certainly, I think in terms of connective tissue that you have labor markets that helps connect people to new jobs, train them to new jobs, motivate them to think they can do those new jobs. We do flexibility really well in the United States, but we do flexibility for employers, not for employees and it takes more than flexibility to make labor markets work.

DM: Why aren't employers doing more here? In certain industries you hear all the time about these app academies that are opening up for people who want to learn to be programmers because there's such a shortage of labor for programming companies that their sort of making their own supply there. Why isn't that happening for lower-skill professions?

JF: I don't know. I hear from businesses all the time the talk about how hard it is to find workers. I always ask them, Well, what if you paid an extra $2 an hour? Would it get easier to find those workers? Then there's a reason why that doesn't work. There's a little bit of a disconnect between what you hear in terms of the difficulty of finding workers and what you see in terms of wages.

We have over the last three years seen wages at the tenth percentile grow faster than at any other percentile of distribution and wages in the middle growing decently. In terms of the longer-term, several decades that's not what we've seen in the market. That, to me, suggests in broad economic terms is it a supply of workers? People don't won't to work. If people don't want to work two things should happen. Fewer of them will work, but the ones who still are working will become really sought-after and their wages will go up. We've seen half of that.

The other explanation is less demand and you don't want as many of those types of workers. What do you see then? Less people working, check. Lower relative wage, check. It feels a little bit more like something that's happened on the demand side of the economy.

DM: This is a theory that Larry Summers has put out there a lot in recent years that we might just be in a time when there is not enough demand in the economy and not just because we had a recession and, obviously, there's a shortfall of demand there, but just as a general matter. Do you buy that and, if so, do you buy his prescription that we might need persistent deficit spending for the foreseeable future to keep the economy in gear?

JF: That's a little bit of a different issue than we've just been talking about.

DM: Sure.

JF: We've been talking about something that's been going for 60 years that might have to do with a demand for a certain type of worker as opposed to an aggregate demand in a macro economic sense. I think we had massively deficient demand in 2008 and 9 and physical stimulus was appropriate then and monetary expansion was appropriate then. We have today still some insufficiency of demand and monetary policy can make its own decisions without me commenting on it.

What we did last year with the fiscal deal of buying back 90% of the sequester means that we actually have mildly expansionary Federal fiscal policy. I think that's good news for the economy in 2016 and a reason to be optimistic. Do I think we need to radically change in good times and bad the rule around fiscal policy? Probably not. Do I think we need to be more attentive to the importance of fiscal policy in recessions? Probably yes.

DM: I wanted to be sure we got to some of the work you've been doing on rents and on ways in which rents from housing and other things have contributed to inequality and hurt the economy. You recently had a paper on this with Peter Orszag. Did you want to briefly layout your main points there and we can go from there?

JF: Sure. We start with a few facts and then figure out an interpretation that helps make sense of all these facts. One fact is we all know that the rate of profit has drifted up and the profit share has drifted up. What's even more striking is if you go below the aggregate level and look at firms and you see some firms are super successful, posting high returns year after year after year and other firms are pretty mediocre. Of course, that's always true. There's always some that are better than average and some that are worse than average. The gap between them has grown enormously.

Combine that with the fact that if you work for a more successful company you will be paid more even if you're doing exactly the same job and have exactly the same skills you would have brought to a less successful company. This increased inequality among firms translates through to wages and is generating and contributing to some of the increase in inequality that we're seeing which is still mostly inequality in the labor market is at the biggest root cause of our increase in inequality.

Then the next question is why is it that some businesses are becoming much, much more successful? I think part of the answer is that an economy that's broadly competitive will compete away those extra profits, but an economy where many sectors are becoming more concentrated, where many firms have figured out ways to erect barriers to entry is one in which you can year after year after year get extra profits without somebody else entering and competing them away. I think that's part of what's gone on.

The flip side of that is a great opportunity in terms of public policy and the thing that we all love most as economists is when we find something where there isn't a trade-off. Actually, I think the thing that economists love most is pointing out trade-offs and making people sad about them. I personally get even more excited if I can find a way to improve efficiency and reduce inequality. Expanding competition, reducing some of these rents I think is one way to do that.

DM: I think the connection here to housing might be a little oblique to some people.

JF: Sorry. I keep using the word rent. Rent is an old economic term, that is you get a rate of return not that you needed to do in order to do it but just a extra bonus because you had the thing. It's that extra bonus that is a wonderful thing to get if you're the one getting it but from the perspective of the economy as a whole may not be so wonderful.

DM: One thing you point out is that a lot of these rents are often literally from rent, that the rate of return for landlords especially in certain set of highly productive urban areas, DC, San Frisco, New York, has gone way up. What do you make of why that is?

JF: It's harder to build in certain places and economics teaches you about supply and demand and if you don't increase supply as much and that's colliding against increasing demand the result is, as your colleague Matt Iglesias said, The rent is too damn high, or house prices are. I think those types of land use restrictions, and it's not just the inconvenience of what it means for the cost of your rent. It's that it stops people from moving to precisely the places where people want to live, in many cases want to live because they're more productive, they have higher wages.

One of the dynamics that had fueled the US economy was convergence. Places that had lower incomes converged to places that were higher incomes. They caught up. Maybe jobs moved there to take advantage of the opportunities or the people moved to where the jobs are but either way you saw a certain amount of convergence. We're seeing less convergence now. We're seeing less convergence because it's just harder for people to move to where the opportunities are.

DM: This seems to put us in a weird situation where one of the biggest macro economic problems we have as a country is controlled by policy at not even the state but the city level. With the exception of DC most places the building rules are not set by Congress. They're set by the city council, the mayor. What role do you as someone in the White House have in trying to solve this?

JF: One thing is drawing attention to it and just making sure people can see the issue documented and the consequences of it documented. Talk to mayors, talk to local officials. We have a budget proposal which would have Federal subsidies that would be incentive payments for localities to take innovative steps to help address this issue. It's something where we already subsidize housing in this country and to make sure those subsidies are geared towards addressing this. You're absolutely right that ultimately the decisions here are and should be local decisions.

DM: Another area where you've identified rents is occupational licensing. I wanted to get a sense of how big of a problem you think that is. It seems like when we're talking about rents housing comes up as the biggest one and occupational licensing is second. How much progress is there to be made there?

JF: In the 1950s 5% of people needed a license to engage in their jobs. Doctors did, lawyers did, many others didn't. Now it's 25% of people need a state license. Partly that's because we have a larger health sector and a larger education sector and those areas are heavily licensed, but that's only about a third of the increase in licensing. The other two-thirds is just with any occupation there is more licensing.

A lot like the land use restrictions this is something that happens, these are decisions at the state level. The problem is the way in which these decisions are often made is a group of people who already have the credential get to make the decision about whether other people can come in and do that job too. The problem is that the result of this lower wages for people who can't get into it but also higher prices. This isn't a great way to band together and pry profits out of the hands of the millionaires and billionaires and get them into the hands of the people. This is about almost taking nickles and dimes from the people and moving them up.

I think this is a real issue. It, once again, is a state issue. Once again we're using our bully pulpit. We have some funding that we got from Congress last year to help create incentives to do this. We're really trying to work with companies and legislatures in certain areas, especially like ex-offenders. In many of these licenses they're just categorically excluded from getting them. Large numbers of jobs they're just literally not allowed to have under state law and that's a big problem especially in a country that has so many ex-offenders.

DM: Is this something that a lot of these licenses are voluntary. The American Bar Association is not a government entity. A lot of these are professional associations. Does that limit what the government can do to stem this trend?

JF: The Supreme Court, you had a case of dentists in North Carolina who had made rules for themselves and the Supreme Court ruled against them on anti-trust grounds saying that a group couldn't basically make rules about who could and couldn't compete in its area. They said the state could make that rule. They just couldn't delegate the making of that rule to the people on who's behalf that rule was being made. I think process here matters.

One of our recommendations has been that states establish sunrise commissions. Rather than delegate to each group the licensing of itself you have a commission that anytime you want a new license you look and you ask, Does it pass a cost benefit test? Not, Is it in the interest of the group that decided it wants a license? but from a broader public perspective. States like Maine that have done that have used those types of institutions successfully.

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